Spec Build - 1st true deal

[Drew Dim]

So my first true deal (besides a raw land flip) will be a spec build. Actually it'll turn out to be 3! My good friend is a builder and let me in on a deal that he knew of. I purchased an old house that I will tear down next month and I'm currently looking for investors. My neighbor is a new realtor (1yr in) and knows an interested investor and we're currently at the discussion phase. If we lock down the money, I'll probably pay her a finders fee ($1,000?)

* Is that common? And if so what amount is typically appropriate?

Im curious of what others think of this deal.

Cost of property (initial + misc holding & tear down) = app. $72,000

* this lot has 3 buildable lots already subdivided by the city

Building:

Materials app. $225000 w/ a pool

GC (my friend's cost - I'll be assisting) app. $35,000 (to be paid at closing)

Realtor 5-6% app. $20-$25k

(if I use my neighbor, prob. be able to do a 5% deal on all 3 houses)

My friend/GC would be the primary GC and I would be assisting and learning as much as I can and trying to lighten his work load bec. of his lower cost.

He has built several of these houses and already has the plans draw up and they have been selling for $400k and his new builds will be going for approximately $415k as the first few were sold to establish the street.

Being conservative I estimate a profit of approximately $60k +or- per build.

I originally was looking to borrow $250k per build to leave room for unexpected costs, and I was offering 15% of the borrowed amount upon completion of the project (not APR) and no monthly payments. Currently these exact houses in the same neighbor hood/street are going under contract before he even breaks ground.

*Does 15% seem like a fair return for a financial investor?

What advice does anyone have for such a project?

Thanks

Drew

[Karen Margrave]

@Drew Dim

• Have you checked with the City Planning and made sure that the lots are buildable lots? There's times when a lot may be considered a lot, based on old standards, and newer standards require more space for set backs, building, etc.
• What size are the lots?
• Are utilities available at the street?
• You say your friend has built other homes that have sold for $400k, were they in the same area?
• Does the price quoted to build each home include all the fees? Landscaping? Pool?
• What size are the homes?
• You say your friend that is the GC is going to build for you, will he be handling getting all the necessary permits, etc. too?
• Why didn't your friend that is the GC put the deal together himself?

Basically you're putting up around 25,000 per deal, and subordinating to a construction loan, meaning you get paid after the construction lender and paying all the fees. Have you thought about what happens if things go over budget? Who handles the money and makes disbursements?

You need to be sure exactly what it is going to cost you to build each house, materials, labor, all permit fees, etc. together with the cost of the loans, and make a decision as to whether there's enough to go around.

Right now, we don't have enough information to give you advice. It would have been better had you come on before buying the lots.